5 Reasons to Fetch PetSmart’s Stock
It’s hard to picture suit-sporting Wall Street big shots playing with puppies, but they sure have been in recent years … at least in their portfolios.
Investors (and a good chunk of them institutional) have taken a liking to specialty pet retailer PetSmart (NASDAQ:PETM), bidding the stock up to current prices around $65 — that’s more than double its price in 2010 and triple what shares were going for back in 2009.
However, since about June of last summer, PetSmart has plateaued, and it’s actually headed in the wrong direction in 2013, down 4% year-to-date vs. an 8% climb for the S&P 500. Consider that a good thing, though, as it presents a buying opportunity for this pet-lover’s stock.
Here are five simple reasons why you should pile into PetSmart right now:
PetSmart has grown revenue every quarter since 2009, making for 21% annualized growth in the past five years and translating to 11 straight quarters of earnings growth. Tomorrow after the bell, PETM is expected to report Q4 earnings of $1.21 per share on revenue of $1.89 billion, which would be 33% and 15% growth, respectively. Expected full-year EPS of $3.53 would represent 38% growth. Those are eye-popping numbers without a doubt.
Of course, high expectations can be a double-edged sword. The $3.53 analyst target is a couple of pennies higher than the company’s already-raised guidance at the end of last quarter. Still, PetSmart hasn’t had any problems hurdling Street expectations. The past three quarters saw PETM beats of 19%, 8% and 16%.
PetSmart is the leader in a niche space: pet products. Sure, there’s privately owned PetCo and local animal boutiques, but it’s not a terribly crowded landscape. Even big-box retailers like Target (NYSE:TGT), grocery stores like Safeway (NYSE:SWY) and Internet retailers like Amazon (NASDAQ:AMZN) — which also sell goods for your poodle or friendly feline — don’t offer the same experience. You can’t take man’s best friend with you to go shopping anywhere else, but he’s more than welcome at PetSmart. (And we all know how fun it is to show off our fuzzy sidekicks to fellow pet-lovers.)
It’s not a game-changer, but it’s an intangible that sets PetSmart apart from less specialized retailers.
PetSmart isn’t just sales. The company also owns 195 PetsHotels (dog and cat boarding facilities) and Doggie Day Camps. It’s a multibillion-dollar market — and growing. Overall spending on such grooming, boarding, hotels and pet-sitting services for pets grew nearly 10% last year alone. Toss in training classes, grooming and adoption shows, and you can see how that not only lures folks in and pays the bills, but creates a lasting loyalty.
What better way to prepare for a PetSmart training class than to buy treats and training gear from PetSmart? Plus, you can believe that any owner who adopts a pet at PETM will be hard-pressed not to be loyal to the place where they first laid eyes on their bundle of fur and joy.
Pets are recession-proof. PetSmart customers — folks who shell out cash to buy their animal friends new squeak toys, leashes or beds — aren’t the penny-pinching breed to begin with; if they were, they’d settle for tossing Buster a tennis ball or some table scraps.
Just consider this: Last year, even as the economy remained sluggish, animal lovers spent a record $53 billion on their pets — a 5% year-over-year increase for 2011, when the total first broke the $50 billion mark. This year, spending is supposed to gain another 4%. The number does include vet costs and medications, but many over-the-counter treatments can be found at PetSmart.
Plus, imagine how much animal lovers will spoil their babies should the economy really start roaring.
PetSmart is sitting on 7% same-store sales growth as of last quarter and has been popping up new stores — PETM has added roughly 50 net locations in each of the past three years. There’s also room to add more “hotels,” and to run north of the border. For now, PetSmart only has 70 stores and five PetsHotels in Canada — a drop in the bucket compared to its total 1,250 locations.
Expanding north is a strategy that Target is also employing, and one that InvestorPlace contributor Will Ashworth is quite bullish on. He believes Target can set itself apart from rivals and snatch up the growing spending power up north. There’s no reason PetSmart — especially considering the aforementioned strengths — can’t do the same.
If PETM investors had a tail to wag, they would. And that sentiment probably isn’t going anywhere for years to come.